In this release of Venture To Know we discuss the key scenarios that prompt an investment fund to undergo an audit.

What Are the Most Common Circumstances That Prompt a Fund To Undergo an Audit?

So you’ve launched a new investment fund, whether a hedge, private equity or venture capital fund. As part of the launch process you made quite a few decisions and absorbed a lot of information, including the best tax structure, what management fees to charge and when, etc. If you haven’t already, soon you’ll be making decisions on which investments will best fit your portfolio and ultimately provide the best returns to your investors.

One of the things you may have already given some thought to is whether or not your annual financial statements are required to be audited.  While all funds have various tax reporting requirements or requirements to file certain forms with their regulators, not all funds are required to have an audit.  So when might a fund need an audit?  The most obvious answer is when it is required by the fund’s Limited Partnership Agreement (LPA).  Many start-up funds choose not to have an audit of their financial statements, at least initially, in order to keep costs down.  However, some funds, depending on various factors, including the types of investors they are looking to attract or already have in the fund, will include an audit requirement in their LPA, typically with a 90-day or 120-day deadline.

This guide has been crafted to address key areas that every emerging manager should consider. From strategic planning to operational intricacies, we’ve got you covered.

When Else Might an Audit Be Needed?

In August 2023, the Securities and Exchange Commission (SEC) issued new rules that require all SEC-registered investment funds to have their financial statements audited annually. The SEC requires any asset manager with assets under management (AUM) greater than $150 million to register. If you’ve just launched your first fund, this may seem like a long way off, however, state registration requirements should also be considered, as your state may have different filing requirements. For example, New York state requires any investment manager with AUM greater than $25 million to register with the SEC. Even for new funds, this AUM threshold is often met, which then triggers registration and filing requirements.

You should always consult your legal and accounting service providers when undergoing the fund formation process.

Contact Us

For more information on this topic, please contact a member of Withum’s Venture Capital Services Team.